What the…….!

No really, these are two funky new terms that we have come across this week whilst surfing the web and of course, we like keeping our readers up to trend with the latest fashions.

So – who fancies joining the new Frugalistas?

It’s the latest fashion of the thrifty chic. Living to excess is so last year. Expensive restaurants, SUVs, luxury holidays and overseas homes? – how passe! Definitely no longer cool. ‘Frugalista’ is the new black. Yes folks – you too can be poor and stylish !

Find some hot tips at sites such as Tips From The Frugalista Moms and The Frugalista Files

On the other hand, if you believe Barack Obama, we must all spend, spend, spend – if not at the consumer level then certainly at the governmental level. Its the only way to lift our economy out of the black pit of recession. Apparently! Nick Robinson of the BBC calls this philosophy Obamanomics, which reminds us of a website we quite approve of

In essence what we are alluding to here is something called The Paradox of Thrift – a term coined by the economist John Maynard Keynes in the 1930s, during the Great Depression. He stated that although being frugal and thrifty seems to be the best policy for individuals, as far as the overall economy goes it can be damaging. So the paradox is that the more we save, the more we reduce demand for goods and therefore the worse the economy gets. It can be quite a vicious circle. The slumping economy means businesses invest less, hire less and increase redundancies. Ultimately the effect cascades through the system and overall income for everybody declines, leading to less money for people to be able to put aside and save. Simply put, as a society overall, the more we save the less we earn. In this way the decline self perpetuates. Bear in mind this is all a theory.

In fact it is part of the Keynesian economic theory that is currently in fashion with Gordon Brown, Barack Obama and their global counterparts.

John Keynes’ suggested solution to the Paradox of Thrift conundrum was that to offset the thrift of consumers in times of recession, the government must step in and take their place. Keynes argued that the state should increase public spending – on hospitals, roads, infrastructure projects etc. in order to inject cash into the economy and try to keep businesses humming and people in jobs. This is even more vital when interest rates are also dropping and deflation (falling prices) is happening. Falling prices can reinforce the thrift instinct in individuals when it comes to big-ticket items because no-one wants to buy a new house or new car if they can see that in 6 months time these items will be even cheaper. Hence they stash the cash and kill the till.

Across the ocean, Obama has a Lightbulb moment………….

The Keynes effect is in full force over in the USofA. In fact it seems there is no end to the amount of money congress is willing to hand out to the ailing US economy. A fortnight ago another half trillion tax payer dollars were earmarked to ‘fight the crunch’. This time Bush (remember him?) wanted to address credit and housing, which experts say must recover to pull out of recession. That’s on top of the previous $470 billion bailout of the Wall St financial institutions (Fannie Mae, Freddie Mac and the rest).

Remember this is in the light of the steepest slump in US consumer spending for 30 years. Not only that but this weekend we heard that US employers axed 533,000 jobs in November, the biggest job cut since 1974. The unemployment rate is now 6.7% which is the highest in 15 years. Yet more record breaking statistics, the likes of which we are kind of getting fatigued of hearing now.

When Obama steps in in January he wants to hand out a further $500 billion +. This will be a ‘jobs rescue package’ with a definite ‘Green’ tint. He says that an “Immediate Infusion of money is needed to jumpstart the system” – looks like Obama has some surgeons and motor mechanics on the fiscal team! Amongst his many green-tinted Keynesian initiatives will be to make government buildings energy efficient by changing all the lightbulbs. Also new alternative energy projects will be an important theme. All these projects will create employment. Strangely though, his other initiatives such as increased road building and bridge construction as well as bailing out the big-3 car manufacturers, although meant to create jobs, are hardly going to help the environment. But right now the mantra is, that the price of doing nothing far outweighs that of the Obamanomics megaspend.

Rest-assured, like any theory, the Obamanomics-Keynesian theory also has its detractors. These critics feel that the infrastructure schemes will simply take too long to get off the ground and out of the planning stages to have any meaningful effect. By the time these projects get on line, the economy might already be past the rock-bottom stage anyway. Furthermore the effect known as ‘Rational Expectations’ may kick in. The general population may come to realise that all this hyper government spending will one day in the future have to be recouped through higher taxes. This expectation may make people spend even less than before and save even more, thus somewhat negating the effect of the increased public spending. Tricky isn’t it? But intriguing!

The biggest worry is that these strategies will not prevent a recession or depression, and worse still we may end up with Stagflation – the thankfully rare malady of a stagnating economy coinciding with a spike in inflation, such as that experienced in the 1960s and 70s, which took until the 80s to recover from (I promise to touch upon the how and why of what stagflation is in the next Ultraletter – so stay tuned – I don’t want to fry your brain cells and mine all at once! )

In the UK Gordon Brown and Alistair Darling are going hell-for-leather down the same route as Bush and Obama. The Germans are meanwhile hissing with scorn. Their finance minister, Peer Steinbrück, tore into Gordon Brown’s £12.5bn cut in VAT, describing the move as “crass Keynesianism” that would raise Britain’s national debt to levels that would take a generation to pay off

Whether we are about to see a new era of Stagflation, possibly on a global scale remains to be seen. Even we are intrigued to see if Keynesianism will do the trick this time around. In case it doesn’t just remember we were dubious all along.

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There’s a reason why Dinosaurs became extinct………..

Sorry to harp on, but those car makers from Detroit – General Motors, Chrysler and Ford – are getting really irksome. They don’t have any money left to fund their inefficient production lines, boring car designs and private executive jets, so now they’re loitering around Capitol Hill, Washington trying to beg some off the taxpayers. This is why the word ‘Shooo’ was invented.

I remember learning in biology class about Darwinism and survival of the fittest. We were taught that the dinosaurs became extinct 65 million years ago due to some cataclysmic event, most likely a comet impact, from which they were unable to recover. Does this sound familiar at all, Detroit folk? No doubt that dinosaurs walked the earth for over 165 million years, but when their time was up, it was up! There was no bailout – period!

But it had to be that way – they were no longer viable in the changing climate. Their large size meant they were resource-hungry and inefficient. They’d had it easy for too long. They could not adapt, so nature allowed their era to come to a close. Were it not for that event however, it’s unlikely that the meteoric rise of the mammals could have occurred. The wondrous creation known as Homo Sapiens may never have had its time. We have been around perhaps only a couple of hundred thousand years – yet look at the astonishing things we have done.

The point is that entities, whether species or companies, should not be given life-support beyond their natural end. If we do that, we will never find out what ingenious ideas or objects may have come in their place. In any case, even if we do try, the end is usually just postponed, not averted.

T Rex was late again to the Extinction Convention

We can understand the quandary facing the politicians. The US car industry reckons it accounts for 1-in-10 US jobs, of which 250,000 are direct employees. In addition, a bankruptcy or failure of the Detroit Three would threaten billions of dollars of financial instruments, according to credit market analysts. On an international level there are also many hundreds of thousands of jobs in related industries that are likely to suffer. So there are a lot of people’s livelihoods at stake here, and we are not callous enough to not care about all of that, so we say go ahead lawmakers, give it a shot. Where you have spent billions on the bank bailouts, why not give some to the car makers too? If you like you can send a couple of cheques our way too. We are sure you wouldn’t even notice a few K’s amongst all those billions.

Ultimately though, it appears that these corporates have already squandered their advantages. Their cars are inefficient and the quality is simply not there. They had decades to get it right. They didn’t have to export since their target market, i.e. the biggest consumers of cars in the world, was at their doorstep. They could understand their customers needs since they were from amongst them. They had the ear of politicians and finance was easy. It was all downhill driving. Yet now the world has decided that they do not want Detroit cars. They want German and Japanese cars. Maybe they don’t want cars at all and they just want LCD TVs instead. So by bailing them out, congress is saying to the world “NO, you must have our cars!” – The world will answer, “Hello? We don’t want them!!”

2009 ain’t lookin’ too good for the Detroitosaurus Rex.


more divine inspiration follows….

Ultranomics and Obamanomics? Now try Godnomics – the pilgrimage to zero interest rates…

The latest round of interest rate cuts around the world have taken rates to amongst their lowest points in half a century. In the UK, USA and Japan they are approaching 0% and according to some analysts are likely to get there soon.

It hardly seems fair.

Yet there is another school of thought, which predates our modern day economists by a fairly wide margin and that could shed an alternative light on the debate. We all know (or should do) that the three major monotheistic faiths, Judaism, Christianity and Islam all have in their literature a prohibition on interest. The Torah, The Bible and The Quran all advise against dealing in interest, whether charging it or even paying it. References on these can easily be googled so I won’t elaborate here.

To my understanding of the idea behind this prohibition, it seems that just like the Paradox of Thrift mentioned above, there is another paradox when it comes to interest. Although at an individual level it may seem totally reasonable and even desirable for banks to extend loans in return for interest so that we can buy a house or start a business, on the macro-economic level it may eventually play a large part in causing the booms and busts that we experience. The theists will argue that taken as a whole, the harm caused by interest is far greater than the good that might come of it, hence it is not allowed. It is a complex subject and not one that can be covered in detail in this Ultraletter, but one worthy of a separate article which we promise to write up soon in the name of research and understanding. In the meantime here is an excellent guide from one of the UK’s leading ethical financial advisers, 1stethical.com, on the subject of Interest based lending in the modern banking system

At the crux of it though, the ‘good savers’ that put their cash away into savings accounts were after interest income without risk, or making money directly on their money without doing any economic activity, e.g. trading or renting out an asset. They were not actually contributing to the economy by spending or investing, but rather trying to earn money whilst taking no risk, i.e. capital was secure. Accordingly since no risk is being taken, to be honest they deserve no reward. It could be argued that its the people buying houses, paying stamp duty and VAT in the process, then spending thousands doing up their houses in the pursuit of happiness and profit who are the real stars of the economy. They are the ones who put their butts on the line! Those amongst them who took too great a risk, i.e. self-certified loans beyond their means or where they had a shaky cashflow, have been punished automatically by losing the asset they acquired.

The Board of 'The Bank of God' do some blue-sky thinking

Suffice to say that with falling rates across the globe, whether willingly or not, the world’s bankers are getting closer to a more divine banking system month-by-month! We wonder though if they will ever see the light. Our breaths are not being held !

See you again next time. In the meantime why not sign up to automatically get the next Ultraletter by email?

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Welcome back everyone! You made it to our second edition.

Here in autumnal UK, it seems we are certainly living through one of those accursed ‘interesting’ times as per the clichéd old chinese proverb.

On the face of it last week’s 1.5% base rate cut (down to a 53 year low of 3%) by the Bank of England should put a smile on the face of every mortgaged person in the country. Lets for a moment put aside the poor pensioners who were relying on a reasonable savings rate to get them through the winter (do I detect a reversal in the declining trend of extended asian families living together?)

Thankfully for us struggling ‘homeowners’ and small business owners (who should have saved for a rainy day anyway) most of the high street banks have agreed to pass the cut on. The Nationwide, Lloyds TSB, Abbey, Scottish Widows, RBS and NatWest said they would be passing on the full 1.5 per cent rate cut. They were followed – eventually – by Bradford and Bingley and the nationalised Northern Rock. A monthly mortgage of £150,000 should reduce by £138 to £887. Bargain.

But by dropping rates are Central banks merely making the same mistake as Alan Greenspan during his time as the US Federal Reserve chief? They are trying to use a drop in real interest rates (nominal rates minus inflation rate) to convince consumers to spend their money instead of saving it. In other words they are attempting to keep the credit bubble inflated, or at least to stop it from deflating any further. This isn’t good monetary policy in the long run as ultimately encouraging people to save, e.g. by giving reasonable rates of return from savings vehicles is the only way to wealth accumulation. The road the bankers would have us take is the road to poverty via debt-servitude; i.e. take out a car loan, get another credit card, remortgage the house. The life of the average Javed and Jameela is thus burdened with paying back interest for trinkets, e.g. lcd tvs, overseas holidays, luxuries, that they could ill-afford in the first place. This is wealth transference from the many to the few.

Sure there is ‘the economy’ at large to worry about and if we as consumers aren’t motivated to spend our money instead of keeping it in our accounts (or safer still, under the mattress) then companies left, right and center will be on the decline and jobs will be lost. Unfortunately though dear readers that is nature’s way. Bloated companies and unlikely ventures should not be saved by artificial means. If a company is competitive and well run it will get through and be stronger in the end. Those that are not must meet their demise and make way for fresh enterprises with new ideas and new jobs. The easy credit of the last 10 years allowed unhealthy risk taking to flourish in business, and Javed, with his imagined new wealth from credit cards and rising house prices bought into the myth of unlimited prosperity disconnected from true wealth-building activities, otherwise known as “hard work” (I apologise to all the hard working Javeds out there – I don’t mean you!)

Our hope here at the Ultranomics desk is that Javed and Jameela, as well as the rest of us with mortgages and loans, will take this opportunity given to us by the fall in rates to use the monthly drop in our payments wisely. Now would be the time to use that extra cash to pay off more of the loan capital where possible. The trinkets can wait! For those with no mortgage to pay but some money in savings accounts, sorry. But hey, cheer up and treat yourself to some new shoes for being such clever people.

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jq ponders on Pakistan’s money flows

Ab Tera Kiya Hoga Kalia!

12th November 2008, JQ (co-editor)

Our brand spanking new democratic PPP government has finally managed to find the sacrificial goat or ‘patli gardun’ responsible for all of Pakistan’s current economic evils. The news is that the State Bank has suspended the licence of Pakistan’s top money changer company Khanani and Kalia International [they used to sponsor news and current affairs on some major Pakistani channels] for 30 days after allegations that it was involved in smuggling $10 billion in foreign currency outside Pakistan.

This smuggling of foreign currency has apparently resulted in a massive downward slide in the country’s forex reserves, which have depleted from over $16 billion in Oct 2007 to now at below $7 billion. What no one mentions is that Khanani & Kalia were only the brokers so who actually owned those $10 billion dollars?

A private TV channel reported that Khanani and Kalia had offered to return the foreign exchange transferred outside Pakistan if the government released them and they have also promised to bring the dollar back to 72Pak Rupees from 78 at the current rate. I mean WOW they surely are the George Soros of Pakistan! But wait a minute, if just 2 Pakistani businessmen have the ability to bring the dollar price down by 6 rupees then what about the masses of wealth of Pakistan’s ruling class [and opposition alike] stacked in European banks and offshore accounts?

I heard the Prime Minister’s Adviser on Interior, Rehman Malik in a press conference saying hundi and hawala are illegal. Really? Since when? There are at least a 100 money changers in Rawalpindi alone right at the door step of the Pakistan Army’s General Head Quarters.

Pakistan has been turned away by all western powers and even China [who we tout about as our bestest buddy] and for what – a measly $5billion to save the country’s economy? Our very own Kalia saab could have done that alone with his special friends!

What I want to say is that instead of looking at the IMF and to beg rich nations all we have to do is have some sharam and sort our tax network and get rid of the double taxation [general sales tax]. So all businesses pay a low amount of tax as compared to a few paying high taxes which in turn gives rise to bribery and corrupt tactics as they try and change the tax rate incidence.

more ultranomics below…..

more views from TK

now the Chinese are feeling the burn…….

The great success story of the new millenium, Pakistan’s friendly-giant neighbour, China is finally beginning to feel the effects of the global slowdown. The great hulking machine that was the powerhouse of world ‘trinket’ production is beginning to run out of steam. (We like the word trinket here at Ultranomics – by it we refer to objects bought by us consumers that often we could do without but we like to acquire to be fashionable or to keep up with our friends, like big TVs, ipods, new sofas, latest shoes).

Anxiety in Beijing is mounting that China’s economy is cooling much more quickly than was initially expected in the face of weaker international demand and a slowdown in the local property market.

Two recent surveys of manufacturers showed a slump in activity in October, confirming anecdotal evidence that the slowdown has accelerated in recent weeks. Some economists believe that growth, which was nearly 12 per cent last year, could fall to as low as 6 per cent next year without a substantial fiscal stimulus.

So, on Sunday China came out with a big bailout program for its ailing economy – a plan called a “Social Stabilization” program, in which the government will spend more than half a trillion dollars (actually £586bn if you prefer your cash in billions rather than trillions) to try to avoid a revolution. With demand from western countries for the trinkets made in Chinese factories dwindling, workers are finding that they haven’t been paid in months and there are reports of bosses just not turning up on a Monday morning and disappearing. Masses of these workers are returning back to the countryside from where they came, often with heads hung in shame, but more often with anger in their eyes. We’re just guessing that this is what is disturbing policymakers in the Mighty Kingdom – the horror of hundreds of millions of desperate, jobless Chinese.

Asian equity markets rallied on Monday – boosted by hope about the Chinese bailout plan. But then, the bad news kept coming…and by market open in New York, hopes were already falling. By the closing bell, stocks ended mixed in Asia and the Dow Jones had fallen 73 points. Gold was trading at about $745 yesterday – after rising on Monday. Oil was slipping again too.

We’ve already seen things begin to go wrong. Unless the next 44 days bring a remarkable bounce, this year will be the worst year for the stock market since 1937. Trillions of dollars has been lost…which has already caused a major change in the way people think. In a matter of weeks, the dominant emotion has shifted from greed to fear.

You’ll remember, the Bush administration worked hard to make people fearful. They came up with those preposterous “threat levels,” trying to convince the masses that they were in constant danger from Islamic terrorists.

Now, the masses actually feel in danger – in danger of losing their jobs and houses. Fear imposed by the government has given way to real fear of the type the Government did not want. They’re never happy are they? Be sacred/don’t be scared. We wish they’d make up their minds. So, when Obama declares that its time for ‘Change’ perhaps he’s thinking about his first job when he gets into office – that of changing the mood of fear into one of joyful confidence. The new Emperor has his work cut out we think!

TIME magazine calls it the “End of the National Nightmare.” No more Guantanamo. Troops out of Iraq. No more ‘threat levels.’ No more suspected terrorists working behind the counter at Burger King. Terrorists? Who cares about them? The danger is now real…and right out in the open. Everyone is living in fear.

Let the history books note that 2008 was the year when in the great USofA the first black president entered the White House and when one hoodwinking scam took the place of the previous one. What americans feared before was a worldwide terrorist assault on their freedom. Yet now, they would gladly give up that same freedom, just to stop losing any more money. The masses need Obama’s administration to give them financing for their homes, to bail out General Motors, to save their jobs and the economy. If they promise to keep us all safe heck the government can do what it wants. We won’t mind.

Thats enough musings for today. More to come soon from the ultranomics desk. Make sure you dont miss the next edition by signing up to the no-obligation regular ultraletter email. It takes just a few clicks!